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Better Buy: Helmerich & Payne, Inc. vs. Nabors Industries Ltd.

Both stocks look pretty cheap today, but you're probably better off with Helmerich & Payne as a future investment.

It's been very hard to notice, but there are signs that we are nearing the end of this long lull in the oil and gas industry. Prices for crude have remained in the $50 per barrel range for a while, and the rapid decline in rigs in the field appears to have finally halted. As producers start to put some cash back in the coffers and look to start growing again, rig companies may be at or close to the end of their multi year lows. If you are thinking about this situation, then chances are Helmerich & Payne(NYSE:HP) or Nabors Industries(NYSE:NBR) have come across your radar.

If you are actually looking for a stock to buy among these two companies, Helmerich & Payne is the clear cut choice. Let's take a look at why Nabors probably isn't the choice today and why Helmerich & Payne is the better buy instead.

On the wrong side of industry needs

A common theme among investors is that if a company's stock has suffered more than its peers in the industry, then you could potentially see a larger gain when the industry recovers. I'm certain more than a few people might take this approach with Nabors Industries. Its stock is down close to two thirds while Helmerich & Payne is down less than 40% since oil and gas prices started in their free fall a couple years ago. However, I would be a little wary of this because there are a couple red flags with Nabors' business that suggest the potential larger short term gain isn't worth the long term risk.

The first thing that really pops out with Nabors is the company's fleet of drilling rigs. Now that the cost to drill shale wells has declined drastically, more and more producers are looking to tap shale reservoirs to grow production. Drilling for shale is a much more complex job than conventional oil and gas reservoirs, and it requires newer, higher specification rigs to get the job done right. Nabors has a decent size fleet of rigs that can handle this work, but its large fleet of legacy rigs are going out of style quick and are dragging down profitability. Last quarter, Nabors reported that its legacy fleet had an abysmal utilization rate of 6%.

If the company's fleet was the only concern, then it may not be so bad. After all, Nabors would only need to retire some of its older rigs to change that dynamic rather quickly. The other concern is that Nabors is still grappling with a very bloated balance sheet that it hasn't made too much of an effort over the years to fix. Going all the way back to 2012, there were concerns with the company's total debt load and its ability to generate decent returns when it was shelling out so much money to service its debt. Three years later, that problem hasn't really improved too much. The company's debt to capital ratio stands at 46% while its debt to EBITDA is at 5.1 times, two metrics that seem to indicate the company's debt woes are far from over.

To be fair, the company has reduced its total debt load by $1.1 billion since 2012, but that is still a rather slow pace. Perhaps the company would be worth revisiting if it were to do a rig fleet makeover and purge itself of debt over the next couple of years. Until that happens, though, Nabors isn't in a position to really benefit from an uptick in the industry like some of its peers.

Continued success

Sometimes it takes a major market downturn for us to remember the value in buying great companies in their respective industries and holding them through the ups and downs of the market. Sure, shares of Helmerich & Payne have taken a beating just like everyone else's, but what this recent downturn has shown is management's ability to manage the tough times of the market and not compromise long term value for shareholders.

Like Nabors, Helmerich & Payne has seen the utilization rate of its fleet drop to a less than appealing 31%, the company has managed to keep costs in control such that it has remained profitable throughout the downturn and has even maintained the position of more cash on hand than total debt. This has been a critical element that has allowed the company to maintain its streak of raising its dividend for 43 years in a row.

Another thing that makes Helmierich & Payne look more promising as an investment is that it has a fleet that is almost entirely comprised of rigs that are built to handle shale drilling. Of the 397 rigs in its fleet, more than 350 of them are designed to handle shale drilling, while the rest is mostly deployed internationally where shale drilling hasn't taken hold yet. This fleet is in part why the company has been gaining market share for more than 8 years now, and those rigs have been generating a premium compared to its peers.

Shares of Helmerich & Payne may not be as beaten up as the rest of the land drillers out there, but you're still getting a well run company trading at a pretty decent discount. That makes Helmerich & Payne look like the much better buy.

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